Last year in June I profiled this stock and argued Genie Energy (NYSE:GNE) was a microcap value stock with a theoretical free call option attached (based on the fact that the market was assigning no value to its oil plays). The stock is up over 70% since my article but most of that move has come in the last few weeks on no individual catalyst that I can find on above-average volume. Therefore, I figured it is time for an update.
I would argue that this company's story is even better than it was last year although now you do have to pay slightly for the "call option" since the stock has moved higher. Additionally, I am not making a buy recommendation at any price here (and those who buy now please note that it has run a long way in a short time), but I am laying out the facts of why I have been long and the upside potential I see. Within the next couple of years I believe the company has the chance to be worth $100 a share with more upside to that over the long term in the most bullish case (please understand I am saying it has a chance to be a 10 bagger to indicate its potential, but this is not a price target of mine as much is speculative here at this point). I would also argue that the downside in this stock is probably around $6 in a bear-case scenario, which I will explain later. You may want to read my previous GNE article first because many of those attributes still hold, but I have reposted some the information again below for completeness in one article.
First, the company trades at about $11 a share with approximately 21 million shares outstanding and has a market cap of only $230 million with cash/marketable securities on the balance sheet (with no debt) of approximately $93 million or $4.4 a share. I would note since my last article the company synthetically bought back about 1.6 million shares by exchanging common stock holders who elected to swap into preferred stock that pays a yield. Effectively, what this brilliant capital markets move did was lever the common stockholders more to the upside (by reducing the common shares outstanding) and gave people who wanted a lower risk, higher-yielding play the opportunity to own that. I would note that the Chairman and largest shareholder (with majority voting rights) Howard Jonas kept all of his common and did not exchange. Therefore, when you add in the face value of the preferred stock ($13.65 million) to the market cap ($230 million) less the net cash position ($93 million) the company only has an enterprise value of around $150 million. Recognizing the company has cash on hand is important to remember as it has capital to fund the opportunities discussed below without the fear of a dilutive capital raise near term.
The Company has two subsidiaries:
1. IDT Energy - A stable cash flow business that generates about $25 million in annual EBITDA and all the revenues ($230 million in revenues in 2012) at GNE currently. IDT Energy is a retail energy provider supplying electricity and natural gas to residential and small business customers in the Northeastern United States. IDT Energy made $25m in EBITDA in 2012, up 27% year over year. I would note that the company is investing significantly to grow this business but all the "investing" costs are in sales and marketing and are expensed fully in the quarter incurred, thereby, reducing the reported earnings of this entity while they grow it, yet they still made $25m in EBITDA in 2012. I will not spend much time on this business, but it continues to grow and is a cash cow for GNE and helps fund the oil ventures described below. This business is my downside protection. I would argue if GNE spent all of its cash on the oil endeavors and it failed this subsidiary is worth at least 5x its $25 million of annual EBITDA or $125 million. $125 million / 21 million shares outstanding is approximately $6 a share. This may be conservative as it is a growing business and I think it is unlikely GNE uses all the cash on the oil plays if they do not work out, but I am looking at downside so I am not forecasting any additional positives here.
2. Genie Oil and Gas (GOGAS) - GOGAS is a business which is pioneering technologies (specifically, in-situ oil recovery technology) to produce clean and affordable transportation fuels from the world's abundant oil shale and other conventional and unconventional fuel resources, which consists of 1) AMSO, which holds and manages a 50% interest in AMSO, LLC (Total SA is GNE's partner here), a oil shale project in Colorado, and 2) an 89% interest in Israel Energy Initiatives, an oil shale project in Israel. In addition, in February 2013, Genie was awarded an exclusive petroleum license by the Government of Israel covering 396.5 square kilometers in the southern portion of the Golan Heights. GOGAS is where there is the huge potential for the stock. It is worth noting that Lord Jacob Rothschild and Rupert Murdoch bought stakes in this subsidiary, so we are dealing with some real players here. The GOGAS advisory board is filled with heavyweights for a micro-cap stock, including hedge fund legend Michael Steinhardt and former United States Vice President Dick Cheney amongst others worth reviewing here.
Let me go into more detail on these GOGAS opportunities individually:
In Colorado, the company has partnered with Total SA (NYSE:TOT) in a 50% joint venture and was given one of four exclusive licenses (the others went to huge oil players) in this area. This venture is named AMSO, LLC. Total SA is committed to footing much of the bill to get the venture fully operational. The initial lease awarded in Colorado is an area of 160 acres. If AMSO, LLC can demonstrate the economic and environmental viability of its technology, it will have the opportunity to convert its RD&D lease to a commercial lease on 5,120 acres, which overlap and are contiguous with the 160 acres covered by its RD&D lease. This oil play is currently in pilot phase (as of March 2013) after initially it had to re-engineer one of the heaters. Therefore, we should know pretty soon if this is going to work or if further research will be needed here. There are potentially 10 billion barrels of oil available in this play according to the company (yes, please note billion with a B). Management is targeting 100,000 barrels of oil a day for 25+ years (if it works). However, it is not just management that thinks this area is rich in oil opportunity. According to reports from the United States Department of Energy, or DOE, oil shale resources in the United States are estimated at over 2 trillion barrels. The majority of those deposits are found in the Green River Formation of Colorado (Piceance Creek Basin), Utah (Uinta Basin) and Wyoming (Green River and Washakie Basins). In March 2009, the U.S. Geological Survey, or USGS, reported that the total "in-place" oil in the Colorado's Piceance Basin is approximately 1.525 trillion barrels. So, in summary, Colorado's Piceance Basin, where AMSO, LLC's RD&D lease is located contains some of the richest oil shale resources in the world (as reported by DOE and USGS sources). Here was an article last year from ABC news on this opportunity and its challenges (again, this is speculative technology, which is unproven to recover the oil).
In Israel, GNE's subsidiary, Israel Energy Initiatives, Ltd., or IEI, holds an exclusive Shale Oil Exploration and Production License awarded in July 2008 by the Government of Israel. The license covers approximately 238 square kilometers in the south of the Shfela region in Israel and grants IEI an exclusive right to demonstrate in-situ technologies for potential commercial shale oil production. This oil play is not yet in true pilot phase (although it has won recent court challenges from environmentalists clearing the path further for the pilot to begin), but IEI estimates there are potentially 40 billion barrels in this oil play. One thing to note is on staff GNE has probably one of the most knowledgeable minds on in-situ oil recovery in the world, Harold Vinegar, who was the former chief scientist at Royal Dutch Shell (NYSE:RDS.A). Here is a comment from Dr. Vinegar on this oil license:
I have examined oil shale deposits all over the world, and nowhere have I seen a reservoir to compare with what we have here in terms of the richness and thickness of the stratum," Vinegar says. "Just in IEI's license area, there is a potential for 40 billion barrels of oil. In Israel as a whole, there are in my estimation 250 billion barrels of oil, and perhaps more. The reserves of Saudi Arabia, for the sake of comparison, are estimated at 260 billion barrels.
I would note the two oil plays detailed above are oil shale plays and are very long term in nature. The company has stated it believes these two geographic locations are in two of the three best locations in the world for oil shale. Please understand that oil shale is different than shale oil. From GNE's 10-K, "Oil shale is an organic-rich, fine-grained sedimentary rock that contains significant amounts of kerogen (a solid mixture of organic chemical compounds) from which liquid hydrocarbons can be extracted. However, extracting oil and gas from oil shale is more complex than conventional oil and gas recovery and is more expensive. Rather than pumping it directly out of the ground in the form of liquid oil, the oil shale can be mined and then heated to a high temperature through a process called surface retorting, with the resultant liquid separated and collected."
An alternative that GOGAS is using is in-situ, which involves heating the oil shale to a high temperature while it is still underground, and then pumping the resulting liquid and/or gases to the surface. In-situ retorting is considered to be less environmentally invasive than surface retorting and can offer significant economic advantages per the company. I would note the company has stated that it believes commercial production may be possible with its methods for about $40/barrel, which is a very important consideration for this to be viable.
I am not an expert on oil recovery methods, and let me be clear again, there is no guarantee this technology it is using will work at all. That is the big, fat, material risk to the upside thesis. If it gets this technology to work, this stock will be worth many multiples of its current price. If it does not and all its other oil plays also fail, please see my bear case estimate of $6 a share from above.
Additionally, the company has one additional license in a potentially conventional oil play. Conventional oil recovery means that if it determines oil is in the ground the recovery methods are traditionally proven methods (oil wells). This license was recently granted and is not without some controversy (there is political risk in this play as Golan Heights is a disputed territory between Israel and Syria). On February 20, 2013, the government of Israel awarded a Genie Energy subsidiary an exclusive petroleum exploration license covering 396.5 square kilometers in the Southern portion of the Golan Heights. The company believes that the license area may contain significant quantities of conventional oil and gas in relatively tight formations. This license will take years to be in formal production as further tests are needed verify the oil is indeed here. I have seen no formal estimates on the amount of oil in this play other than management's word of "significant." I would note one should read GNE's recent 10-K as it talks about several other possible opportunities it is looking into - said another way, I imagine it will acquire additional licenses for oil opportunities in the future.
The following link (from a few years back) I will pull out of my previous GNE article as it is one of the things that caught my eye initially on this story and it relates to the largest shareholder and Chairman of GNE Howard Jonas and his thoughts on this opportunity. This guy has an interesting past and is a self-made man. Mr. Jonas thinks GNE could be worth 1/2 of Exxon (NYSE:XOM) if it proves to get the oil out of the ground using the technology (make sure to read page two of the link). That's around $200 Billion today! That sounds extreme to me, but it gives you a sense for the large potential that may exist here. I would note Mr. Jonas has purchased more stock in GNE on the open market since its spin-off, so he is a believer.
One other recent item I found interesting was in a recent interview with CNBC, hedge fund legend Michael Steinhardt, who is on the GOGAS strategic advisory board, who indicated he was generally bearish on the markets, but GNE was the only stock he named (in this interview) that he was long. I have to imagine he may know reasons to be bullish that are not public if GNE was on his mind enough to mention it in this forum.
So, basically what you have is a company with a sophisticated management team and an all star board/investor group that owns speculative oil assets with multi-billion dollar upside combined with a cash flowing "utility" business, plus around $90 million of cash for a market cap of around $230 million. So, while $100 a share is a far distance from the $11 a share where it is today, $100 a share is only a market cap of about $2 billion with the current share count, which doesn't seem quite as improbable (when considering the potential of the multiple multi-billion barrel oil plays it has).
I have no idea if the oil plays will hit and imagine there is a high likelihood all of them do not work. However, it is hard not to be intrigued by the upside and the asymmetric risk reward proposition at this market cap level on the chance that some of these oil plays do pan out. At least I know I have good company thinking there is a chance with the players involved here.